Realty Income's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Realty Income Corporation (O)
by: SA Transcripts

Realty Income Corporation (NYSE:O)

Q1 2014 Results Earnings Conference Call

May 01, 2014 04:30 PM ET

Executives

Janeen Bedard - Associate Vice President

John Case - Chief Executive Officer

Paul Meurer - EVP, CFO and Treasurer

Sumit Roy - EVP and Chief Investment Officer

Analysts

Juan Sanabria - Bank of America

Jonathan Pong - RW Baird

Vikram Malhotra - Morgan Stanley

Todd Stender - Wells Fargo Securities

Cedrik Lachance - Green Street Advisors

Rich Moore - RBC Capital Markets

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Realty Income First Quarter 2014 Operating Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today Thursday, the 1 of May 2014. I would now like to turn the conference over to Janeen Bedard, Associate Vice President. Please go ahead ma’am.

Janeen Bedard

Thank you Lorenzo and thank you all for joining us today for Realty Income’s first quarter 2014 operating results conference call. Discussing our results will be John Case, Chief Executive Officer; Paul Meurer, Executive Vice President, Chief Financial Officer and Treasurer; and Sumit Roy, Executive Vice President and Chief Investment Officer.

During this conference call, we will make certain statements that may be considered to be forward-looking statements under Federal Securities Law. The Company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater details the factors that may cause such differences in the Company’s Form 10-Q.

I will now turn the call over to Mr. Case.

John Case

Thanks, Janeen and good afternoon and welcome to our call. I’m pleased to report an excellent start to 2014, with AFFO per share increasing just under 7% to a record quarterly amount of $0.64.

Paul, you want to expand on the numbers?

Paul Meurer

Thanks John. So as usual let me comment on our financial statements just provide a few highlights of the results for the quarter, starting with the income statements. Total revenue increased 26.3% for the quarter obviously, this increase reflects our significant growth from new acquisitions over the past year as well as some healthy same-store rental growth on an annualized rental revenue basis, at March 31st, our annualized rental revenue was $867 million.

On the expense side, depreciation and amortization expense increased to almost $90 million in the quarter as depreciation expense has obviously also increased with our portfolio growth. Interest expense increased in the quarter to $51.7 million. This increase was primarily due to the $750 million, issuance of 10 year bonds we did last July as well as some credit facility borrowings during the quarter.

On a related note, our coverage ratios both remain strong with interest coverage at 3.9 times and fixed charge coverage at 3.2 times. General administrative, or G&A expenses in the quarter were approximately $12.9 million. Our G&A as a percentage of total rental and other revenues has decreased to only 6%.

Our projection for G&A for 2014 remains the same at approximately $50 million. Property expenses were $10.6 million for the quarter. However, this amount includes $6.4 million of property expenses reimbursed by tenants. The property expenses that we are responsible for were approximately $4.2 million for the quarter. And our projection for 2014 our property expenses that we will be responsible for also remains the same at approximately $16.5 million. Income taxes consist of income taxes paid to various states by the company and they were just under $1.1 million for the quarter.

As we explained in the press release we’ve chosen immediate early adoption of the new accounting regulations related to discontinued operations, which were just released a few weeks ago. So our property sales, gains, impairments and other related revenues and expenses will now appear throughout the income statement as oppose to being aggregated in the discontinued operations line.

During the quarter we did record impairments of $1.7 million and gains on sale of $3.9 million on properties sales and properties held for sale at March 31st, and if see there is new line items in the income statement. Some of this information continues to appear in the discontinued operations line however, if it was associated with properties that were already held for sale at December 31st. And this topic is discussed and explained in more detail in our 10-Q.

Preferred stock cash dividend totaled approximately $10.5 million for the quarter and net income available to common stockholders was approximately $47.2 million for the quarter. Funds from operations or FFO per share was $0.65 for the quarter and 8.3% increase versus a year ago and as John mentioned adjusted funds from operations or AFFO or the actual cash, we have available for distribution as dividend was $0.64 per share for the quarter, a 6.7% increased versus a year ago.

We again increased our cash monthly dividend this quarter, we've increased the dividend 66th consecutive quarter, a 16.5 years of consecutive quarterly dividend increases and our dividends paid per common share increased 6.4% this quarter versus a year ago. Our monthly dividend now equates to a current annualized amount of approximately $2.19 per share.

Briefly turning to the balance sheet, we've continue to maintain a very conservative and safe capital structure. As you know in early April, we raised $529 million of new capital with a common equity offering, which used to repay borrowing on our $1.5 billion acquisition credit facility.

Our acquisition credit facility today currently has a balance of approximately $285 million, we have plenty of availability on that facility. We did assume approximately $46 million of in place mortgages during the first quarter so our outstanding mortgage debt at quarter end increased to approximately $799 million. Our bonds, which are all unsecured and fixed rate and continue to be rated BAA1, BBB plus, our weighted average maturity of 7.4 years. Our overall debt maturity schedule continues to be in very good shape of only $48 million of mortgage principal coming due in 2014 and $125 million of mortgage principal in 2015.

And our next bond maturity is only $150 million due in November of 2015. Our debt-to-EBITDA at quarter end was only 6.1 time. Currently our total debt to total market capitalization is approximately 30% and our preferred stock outstanding is only 4% of our capital structure.

So in summary revenue growth this quarter was significant. Our expenses remained moderate, so our earnings growth was very positive. Our overall balance sheet remains very healthy and safe and we continue to enjoy excellent access to the public capital markets to fund our continued growth with well priced long term capital.

Now let me turn the call back to John who will give you some more background.

John Case

Thanks, Paul. I will begin with an overall of the portfolio which continues perform well. Our tenants are doing well, based on what we are seeing today. We ended the quarter with 98.3% occupancy based on the number of properties with 73 properties available for lease out of 4208 properties. This is our highest occupancy since the third quarter of 2007, and occupancy is up from 97.7% one year ago.

Occupancy based on square footage and economic occupancy are 99% and we expect our occupancy to remain fairly stable for the foreseeable future. Our portfolio remains diversified by tenant, industry geography and to certain extent property type. At the end of the first quarter, our properties were leased to 211 commercial tenants in 47 different industries located in 49 states in Puerto Rico. 78% of the rental revenues from our traditional retail property types while 22% is from non-retail property types, the largest component being industrial and distribution assets. We believe this diversification leads to a more predictable cash flow stream for our shareholders.

At the end of the first quarter, our 15 largest tenants accounted for 46.4% of rental revenue. This is up a 180 basis points from the last quarter. We made additional investments in two of our top 15 tenants, Walgreens and Dollar General which drove this slight increase. In 2008, our top 15 accounted for 54% of rental revenue, the percentage is moved down, while the composition of tenants from a credit perspective has markedly improved.

Today, 61% of our top 15 tenants based on rental revenue has investment grade credit ratings. In 2008, none of the rental revenues from our top 15 tenants came from investment credit rated tenants. So, we've made good progress on improving the credit profile of the top 15.

Our top 15 tenants remained unchanged, however there has been some movement within the top 15. No single tenant accounts for more than 5.4% of rental revenues, so a diversification by tenant is favorable. Walgreens is now our largest tenant at 5.4% of rental revenue, which is up slightly from last quarter.

Walgreens replaced FedEx as our largest tenant. FedEx is now our second largest tenant at 5.2% of rental revenue which is unchanged from last quarter. Dollar General moved up six places and is our third largest tenant today at 5% of rental revenue. We continue to like the deep value proposition, the dollar industry offers to consumers in this economic environment with consumers continuing to be under pressure. And Dollar General remains a dominant player in the sector.

Family Dollar and L.A. Fitness that's our fourth and fifth largest tenants at 4.7% and 4.6% of rental revenue respectively. All other tenants are at or below 2.9% of rental revenues.

If we get to the 15th largest tenant which remains Walmart, Sam's Club, it represents only 1.5% of rental revenue and the percentage is trail of from there. If you move another five spots and go to our 20th largest tenant, it represents only 1.2% of rental revenue. We also added five new tenants to the portfolio during the quarter.

Convenient stores remain our largest industry, but continue to decline as a percentage of rental revenue. Convenient stores now represented 10.3% of rental revenue down from 10.6% last quarter, drug stores are now at 9.5% down slightly from 9.7% last quarter, and dollar stores are now at 9.1% up from 7.1% last quarter as a result of a dollar generals we added during the first quarter.

Health and fitness is at 6.9% virtually unchanged from last quarter. Theaters are at 5.4%, transportation services are at 5.3% then all other industry categories below that or at or below 4.5% of rental revenue.

Looking at property type. Retail, as it always has represents our primary source of our rental revenues currently at 78% of the portfolio, with industrial and distribution at 11%, office just over 6%, and the reminder basically divided between manufacturing and agriculture properties.

We continue to focus on retail tenants that meet our investment parameters, more than 90% of our retail portfolio has a service non-discretionary and/or low price point components to their business. We believe these characteristics better position these tenants to successfully operate in all economic environments and make them less vulnerable to Internet competition.

Our weighted average remaining lease term continues to be just under 11 years. And our same store rents increased 1.5% during the quarter as compared to the first quarter of 2013, some of the industries that drove our rent growth include convenient stores and quick service restaurants.

We believe 1.5% is the solid growth rate and expected to continue around this level for the foreseeable future.

Let me take a moment to discuss tenant credit. The credit quality of the portfolio continues to improve with 44% of our rental revenue generated from investment grade tenants which is up from 40% at the end of last year. Again, we defined an investment grade rating company, it’s having an investment grade rating by one or more of the 3 major rating agencies.

This revenue percentage is also up from 36% at the end of the first quarter in 2013. We’re also pleased with the rental growth we’ve been able to generate from these investment grade tenants approximately 70% of our investment grade leases as a percentage of rental revenues, have rental rate increases in them which averaged 1.5% annually consistent with our historical portfolio rental growth rates.

Property acquisitions, we had a very busy first quarter. We completed $657 million in acquisitions during the quarter at an initial yield of 7%. This is the second most active quarter for acquisitions we’ve had in the company’s history. As a reminder our initial yields or cash yields are not GAAP cap rates which can be higher due to straight lining of rent. We continue to invest in attractive investment spreads relative to our weighted average cost of capital.

So now I’d like to hand it over to Sumit to provide additional details on our acquisitions. Sumit?

Sumit Roy

Thank you John. As John mentioned during the first quarter of 2014 we invested $656.7 million in 337 properties at an average initial cash cap rate of 7% and with the weighted average lease term of 14.2 years. 84% of the revenues generated by these acquisitions is from investment grade tenants. These assets are leased to 22 different tenants in 15 different industries. Most significant industries represented with dollar stores and drug stores.

The properties are located in 35 states, 88% of the investments are comprised of retail properties and 8% are industrial assets. Regarding sourcing, we continue to seen from last year of seeing record transaction flow. We sourced $8.1 billion in the first quarter approximately 85% of the transactions closed in the first quarter were relationship driven.

We continue to utilize our relationships and remain very selective in our investments. As to pricing cap rates remained tight in the first quarter with investment grade properties continuing to trade in the 6% to 7% range. Non-investment grade properties are trading from 7% to 8.5% cap rate. But first quarter 2014, our investment spreads remained healthy. Looking at our spreads relative to our weighted average cost of capital, we averaged the 156 basis points, which is comparable to our historical leverage. We have continued to make investments at historic spreads whilst improving the credit quality of the tenants and cash build associated with those investments.

In conclusion, we feel like we have had a good start to the year with $657 million in investments in the first quarter and continue to see record volume of net lease acquisition opportunities. Despite a very competitive environment, we feel confident regarding leasing our investment forecast of $1.2 billion for 2014. Thank you.

John Case

Thanks, Sumit. During the quarter, we closed just over half of the $503 million transactions with Inland diversified that we announced at the end of last quarter. Our quarterly acquisition figures include $274 million from this transaction. The beginning of the second quarter, we closed an additional $94 million of Inland and we expect the majority of the remaining properties to close during the remainder of the second quarter. We continue selling select properties and redeploying the capital into investments that better fit our investment strategy. During the quarter we sold 11 properties for just under $30 million at an unlevered IRR of approximately 10% which is consistent with where the company has been realizing returns on dispositions over the last couple of years. We now believe our dispositions for 2014 will be approximately $75 million versus our previous guidance of $50 million to $75 million.

Moving on the balance sheet as Paul mentioned we remain conservatively capitalized with excellent access to capital. On April we executed a $529 million equity offering, our second largest equity offering in our history, the offering was upsized from $10.5 million shares to $13.8 million shares. Following the offering we have ample liquidity for our initial funding of acquisitions activity. We will continue to permanently match upon our acquisitions with equity capital and long term debt with the majority being common stock. Outside of the credit facility, a 100% of our outstanding debt is fixed rate, so the balance sheet continues to be in excellent shape.

We achieved record quarterly AFFO per share of $0.64 in the quarter representing increase of 6.7% from a year ago. Our earnings guidance for 2014 remains at $2.53 to $2.58 per share, again an increase of 5% to 7% over 2013. Our growth and earnings led to an increase in the dividend paid per share by just over 6% compared to one year ago. In March we declared our 75th dividend increase since the company went public in 1994. And we remain optimistic there are activities will continue to support our ability to increase the dividend.

Our payout ratio during the first quarter continued to decline to approximately 86% of our AFFO, which is at a level we are comfortable with. 2014 is shaping up to be another solid year for the year, we continue to see a robust, but also competitive market for acquisitions.

With opportunities in both in investment grade and non-investment grade retail assets. Our long-term relationships for tenants, owners, developers, advisors, continue to generate excellent acquisition opportunities to us and we continue to anticipate $1.2 billion in acquisitions for the year.

With that, I'd like to open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria - Bank of America

Hi guys. Just a couple of questions, first on the Dollar store exposure, Family Dollar had a bit of a tough go I think they have announced store closing. Can you comment on your exposure there and sort of how you view the real estate and the rent coverages?

John Case

Sure Juan. We continue to like the sector due to discount orientation and the fact that these formats are appealing to the aging demographic and we feel good about Dollar General and Family Dollar. You're referring to Family Dollar's quarterly conference call a couple of weeks ago, where they disclosed for the first six months of their fiscal year, they had a decrease in same store sales and they also announced that they were going to close some of their older and smaller formats about 5% and of their 8,500 total stores, the impact to us should be not existent to minimal because we don’t own those types of stores, our stores have healthy, cash flow coverages and are performing well and the average lease term on our family dollar portfolio is 13 years. So of course any stores that would be closed would continue to pay rent during the remainder of the lease term, but we don’t think we’ll see any material if any impact our portfolio.

Juan Sanabria - Bank of America

Okay thanks for that its good color. And on the restaurant side, it’s been a big driver of incremental growth across retail landlords platforms, can you speak to your sort of historic results on being able to release restaurant leases upon maturity kind of what their rent profile looks like over time, I know you guys have a deep history with initial beginnings?

John Case

Yes, that’s right Juan and I’ll address that question in two parts, first is, our experience on the quick service restaurants has been outstanding, virtually everyone that’s rolled in the company’s history it’s been re-leased to the same tenant. A couple of sales and I can’t think off the top of my head any examples where we gone out under re-lease the QSR to a new tenant.

So the performance there, is been very solid and we’ve been pleased with that. On the casual dining sector, as you know it’s an area that we're less pleased with and over the years we had a number of issues in that sector with the phase and families and there we’ve had more lease rolled where the existing tenant that not renew or exercised their auction and often we will re-lease those to local non-chain affiliated restaurant operators and take a bit of a discount on the rents relative to the expiring rents.

Juan Sanabria - Bank of America

Great thanks. And I think you noted this earlier but I just missed it. What percentage of the overall portfolio I know you mentioned for the top 15 is investment grade?

John Case

Yes. 44% of the overall portfolio is investment grade.

Juan Sanabria - Bank of America

Great. Thanks John. I appreciate the time.

John Case

Hey thanks Juan, appreciate it.

Operator

Thank you. Our next question is from the line of Jonathan Pong with RW Baird. Please go ahead.

Jonathan Pong - RW Baird

Hey good afternoon guys. We’ve not heard about how the more traditional single tenant retail net lease assets like the Walgreens, (inaudible) going for low 5 high 4 cap rates as you look forward is your acquisition team adopting to that environment by maybe going after assets with more unconventional service tenants like child care for instance that would be technically considered retail, but aren’t could only a meaningful part of the portfolio?

John Case

No, I am we’re still focusing on the retail tenants in the industry that meet our investment plan, we have not changed those. I mean I think we’re fortunate based on our deep relationships with the tenants that we’re seeing transactions and investment opportunities that are not fully on market, but I am not aware of where properties are trading that type and those properties types.

Jonathan Pong - RW Baird

Got it that also. And then I guess if you think about the corporate sale lease back pipeline historically it seems like that’s almost feel like a two that it seems to get refilled, but with all the new competition looking for those kinds of assets these days, do you see that pipeline shirking into deeper into the cycle?

John Case

Well, I think there is more competition, but the opportunities continue to be plentiful. And so I don't really see the sale lease back opportunities declining. But I would say that the overall competition is probably greater than even it was your 12 to 24 months ago.

Jonathan Pong - RW Baird

Okay. And then maybe just a quick (inaudible) from that question. The supply that retailers there building out, I guess let's say your future sale or lease back pipeline. Do you still think that the growth is rational or are there some categories where you could see becoming another Family Dollar situation where they have to (inaudible) growth and close a few stores?

John Case

Well, going back to Family Dollar, they're actually going to increase their store count. So they're going to add more stores than they close.

Jonathan Pong - RW Baird

I meant just bringing down the rate of growth that they won’t expected?

John Case

Yes, yes. Well, we monitor that very carefully and look at potential saturation issues and we're certainly comfortable with tenants in the industries and our portfolio right now. And we're not Jonathan we're really not seen any of that.

Jonathan Pong - RW Baird

All right. Thanks a lot John.

John Case

Thanks.

Operator

Thank you. Our next question is from the line of Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra - Morgan Stanley

Hi guys, good afternoon. Could you give just give us a break down after 1.5% same-store rent courses how that kind of pan across maybe retail in the other segments?

John Case

On the investment grade is that what you're asking?

Vikram Malhotra - Morgan Stanley

No, the same-store rent the 1.5% same-store rent growth. Could you just kind of break that out between maybe retail and office industrial, et cetera?

John Case

Yeah, the majority of that came from the retail sector, I don’t have the exact percentage Paul do you have that in front of you?

Paul Meurer

Yeah, there were good, we call it good surprises, you are talking about the percentage rent, right?

Vikram Malhotra - Morgan Stanley

Yes.

Paul Meurer

Yes, the percentage rent was quite robust, generally speaking about 50% of our percentage revenue get in the first quarter, about 30% we get in the fourth quarter and remainder throughout the other parts of the year, so its going to be a twin factor on first quarter results and that’s actually where you are seeing of robust revenue number this quarter was from the percentage rent, and we had what I would describe as very good, unlike these we are surprised renewal is going to be solid but the percentage rent came in really nicely from a couple QSR tenants and just a couple of other historic tenants where their results were better than we thought.

I wouldn’t say there is the story to share with you as it relates to trying to nail down maybe where consumer spending habits or anything like that so we don’t really haven’t seen like that to convey.

Vikram Malhotra - Morgan Stanley

Okay, sorry I was about, I mean, that’s useful Paul I was just kind of trying to get a sense the 1.5 was it like 2% on the industrial and office side versus like 1.5, 1.25 on retailer I was just kind of get the breakup of that 1.5%? The same store rent grow that you reported for the 2,700 properties?

Paul Meurer

Yes, roughly speaking on retail it was about 1.2% on industrial just under 2 manufacturing, which we don’t have much 1% office about 1.75% and then agriculture again about 1.3%.

Vikram Malhotra - Morgan Stanley

Okay, got it. And then just the 7% yield on the acquisitions, is that assuming that's a cash yield, initial cash yield?

John Case

Yes, that's a cash yield.

Vikram Malhotra - Morgan Stanley

Okay. And so as you, I mean look at kind of future acquisitions, do you feel comfortable that kind of that you mentioned between relationships and non-relationships that kind of split will remain kind of be in that range over the next few quarters. And is that, given all the competition on for deals, do you think the kind of the little bit benefit that you get on the pricing standpoint from relationships for whole crew as well?

John Case

Yes, I think we said achieved about, up to 20 to 25 basis points greater yield on relationship driven transactions, and as we look at what we're working on in the pipeline. And really just from judging from our business model over the last couple of years, we know that we're going to run somewhere in the neighborhood of 75%, 80%, 85% of our activity should be relationship driven.

Vikram Malhotra - Morgan Stanley

Okay. Thanks guys.

John Case

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Todd Stender with Wells Fargo Securities. Please go ahead.

Todd Stender - Wells Fargo Securities

Hi, thanks. What were the annual rentals on the investment grade rated properties that you made in the quarter? I know it's the overwhelming majority. And then the remaining portion of that either below investment grade or non-rated kind of break out the rent bumps?

John Case

Yes, on the investment grade for the quarter, we had lease growth of about just under 1.5%. And on the non-investment grade, it was actually about the same, a bit more.

Todd Stender - Wells Fargo Securities

It was then on your portfolio, because where I was going with this is the acquisitions you made in the quarter?

John Case

That's on the acquisitions for the quarter.

Todd Stender - Wells Fargo Securities

Okay. Thank you, John. And Sumit, you gave the spread of your cost of capital, I think you it was in excess of a 150 basis points. Do you have the spread that was just over the cost of equity?

Sumit Roy

Yes. It was 35 basis points.

Todd Stender - Wells Fargo Securities

Okay. And how does that kind of look relative to your raise you made in October and as well as March of last year?

Sumit Roy

I think the equity that we raised in April was right around $40 and the way we’ve calculated our nominal cost of equity is on a volume graded average priced for the quarter. So the price that we’ve assumed is $41 as the stock price, and then of course we’ve taken -- the way we’ve traditionally calculated our cost -- nominal cost of equity.

John Case

And Todd today where the price is, the cost of equity is about [6.3], so, it’s about 70 basis point spread. Our 10 year debt costs are just a bit over 4%, so our blended WAC is right at about 5.2% today. So actually, our spreads are bit wider as we sit here today than where they were for the quarter. And 160, 155 for the quarter is right around our historical average. So we're well north of our historical average today.

So we’ve been pleased with where our spreads held up here even though that market continues to be competitive and pricing tight.

Todd Stender - Wells Fargo Securities

That’s helpful. Thank you John. And Paul, you tapped the accordion’s feature, that extra 500 million. Do you need it now, is there a finite period for you to keep that outstanding, I mean you just paid it down are you lying down the equity, just kind of seeing what you’re -- how you feel about looking into midyear to have that $1.5 billion outstanding?

Paul Meurer

Yes, we’re going to leave that in place if you will that $1.5 billion of liquidity if you will run till May of ‘16 plus a one year extension option within our control, so really May of 2017, so we feel really good about that having that running room with that. And we see ourselves carrying some level of a balance on that facility. Those of you like yourself have known us the long time might not be familiar with that, you’re still just kind of pay down the line to zero pretty quickly at times but that’s when we had a smaller line, was part of that. And so now you’ll see us run a balance where we are today, $285 million today and feel comfortable with that given the size of the company, given that it really is our only piece of variable rate debt exposure in the balance sheet. So we feel good about the $1.5 billion, having that sort of capacity and how long we have left on that maturity wise. And like I mentioned we’ll have a little bit of a balance on it on a regular basis.

Todd Stender - Wells Fargo Securities

Great. Thank you.

Operator

Thank you. Our next question is from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.

Cedrik Lachance - Green Street Advisors

All right, thank you. You were talking about 75% plus of your acquisitions this quarter with relationship tenants. How much of that is a first generation sale lease back versus acquiring properties with existing leases with tenants you have a relationship with?

John Case

Yes. You know about half, 50% was sale lease back directly with the tenant and the other half were existing leases that we acquired primarily with tenants that we had established existing relationships with.

Cedrik Lachance - Green Street Advisors

Okay. When we think about the additional spreads you are talking about first generation sale lease back?

John Case

Well, it can be more than that. When we define relationships, it’s we’re directly in negotiation with the tenant that we’re the only buyer. But it also includes where we’re provided by the seller at last look, the look at the investing in the property based on our relationship or we are able to secure the property at a lower price given our relationship with that tenant. So it’s not exclusively sale lease back.

Cedrik Lachance - Green Street Advisors

Okay. In terms of the assets that were disclosed, obviously it’s a small amount but it gets about $1 million per property. What kind of assets were and how many of those were vacant?

John Case

Yes. Well, the number of vacant properties of the 11 were 3, 8 were leased and the types of assets these are we say that the assets that no longer fit our investment strategies. It was some casual dining and some childcare centers that we had owned for a while that were neighborhoods squared, the demographic that changed. And really the neighborhoods were no longer going to support that use for the property and we elected to sell those.

So, it’s generally in one of those segments that are very much out of favor with us.

Cedrik Lachance - Green Street Advisors

Okay. And just final question in regards to leasing, so when I look at the occupancy gain this quarter, it appears to me that I think a lot of that would come from acquisitions given that you buy 100% property, it seems the vast majority of the occupancy gains are actually due to buy 100% assets. How many properties that came due for renewal were renewed this quarter, and how many of the vacant property that you have at December 31 has been really and are currently occupied?

John Case

Okay. Well, so far we’ve had, I think it was 45 this year that we rolled and renewed either for the existing tenant -- 90% of those went to the existing tenants with remainder going to new tenants. And then you’re right, with regard to the occupancy, we had 70 properties vacant a year ago, I am sorry a quarter ago and then we had 73 vacant at this quarter end. So occupancy really would have been flat rather than ticking up by one tenth of a percent; acquisitions [drove] that. But on a year-over-year basis it would still have grown just a bit, because we have 73 properties vacant at the end of the quarter versus I think it was 81 at the end of the quarter in 2013.

Cedrik Lachance - Green Street Advisors

Okay. So how would you describe the environment in terms of being able to lease the currently vacant property, where you at negotiations, [what are] the offices you can lease them versus deciding to sell them?

John Case

Yes. Well, the portfolio is performing well and the tenants are doing well, and that environment is leading some more releasing on these vacant assets than sale. And it’s very attractive term, so the majority, the vast majority of these taken assets are being re-leased rather than sold right now.

Cedrik Lachance - Green Street Advisors

Okay. Thank you.

John Case

Thank you.

Operator

Thank you. Our next question is from the line of Rich Moore with RBC Capital Markets.

Rich Moore - RBC Capital Markets

Yes, hi guys, good afternoon. Just to expand for a second on Cedrik’s question, you have a 119 leases expiring for the rest of the year and I'm curious are you saying that probably 90% of those are renewed, is that the idea that's through the renewal rate, as you think about the years going forward including this year?

John Case

Yes, this year we're expecting about 90% of those to renew, probably 5% will be leased to tenants and 5% sold. Over the longer history of the company, if you go back to since the mid 90s that number has been 70% of the [roles] would go to the existing tenant, 20% the tenant and 10% would sold and reinvested in new properties.

We've gotten a bit better at that over the last 10 years and certainly a bit of stronger economic environment today leading to even better numbers. So that's where the 95% and 5% are coming from, Rich.

Rich Moore - RBC Capital Markets

Okay, good John. Thank you, that's helpful. Then just in general, I mean how are you viewing the whole, I mean we watched the mall guys for example report and they have all seen increases in bad debt, they talked more about bankruptcies picking up. And I'm curious do you guys seeing more store closings, more bankruptcies? And then what is your bad debt situation or your aging on your accounts receivable, I mean are you seeing any changes I guess with regard to tenants on any of that?

John Case

Right now, the tenants are in good shape and even the ones that -- the casual dining tenants that we've had that is gone through a couple of bankruptcies are performing well. So, our watch list has gone from probably 23% four years ago to just over 5% today and that watch list is that flat category that we are looking at those tenants very closely and monitoring their operations because they’ve been under some level of stress. In fact couple of these casual dining concepts and one of the QSRs that we’ve been concern about from a credit perspective contributed to our percentage rents this quarter and are performing well.

So I’m not going wood here Rich, the portfolio is in good shape.

Rich Moore - RBC Capital Markets

Okay. So no pick up in bad debt for you guys, or…

John Case

Let me add Paul address the bad debt.

Paul Meurer

Yes, and I’ll give you a few numbers Rich that might be instructive in 2009, bad debt expenses 1.9 million; 2010 1.2 million; 2011 650,000; 2012 500,000; last year 250,000. And the first quarter of this year so far it’s been 59,000. So obviously there is no issue there that’s popped up in those numbers and that will be, figure that on an annualized basis, what about 240,000 or the lowest bad debt expense here we had in about 10 years.

So from that standpoint I think we’ve done a nice job pruning the portfolio of a lot of these tenants that have given that these computations in the past.

John Case

So while we are not had an outstanding economic environment by any stretch of the imagination over the last five years we’ve seen it slowly improve and we're pleased with the progress there.

Rich Moore - RBC Capital Markets

Very good, yes that’s impressive, you guys always come prepared I like that great. And then the last thing for me is, the disposition strategy, I’m not sure quite understand that you guys are so big 44,000 plus properties and you sell a dozen, almost seems like it’s not worthy effort to even bother with dispositions if it’s so tiny. I mean how do you view the whole family, I mean is it someone approaches you and is looking at property that kind of thing, is that what’s happening?

John Case

No, we have an asset management group that looks at assets where we think we’re better off selling those. And we’re also looking at the roles and the vacant properties and considering selling some of those. So it’s a proactive and not a reactive approach. And it’s one that we’ve only put into place in the last couple of year. So we’ve grown it last year. We’ve sold $134 million in dispositions and again the properties that really don’t meet the investment parameters today or perhaps they are a property that may meet the investment parameter today but longer-term we think they could be turned into an issue for some reason, maybe the markets declining or maybe we have some exposure on our rents or something like that. So, it will continue to be more material than it has in the past. This year we’re seeing $75 million now but it’s a worthwhile exercise. And fortunately we don’t have a $1 billion slug of assets that we need to sell. I think we’ve done a pretty effective job of underwriting and managing the portfolio.

So, this is about a level that we’re comfortable with. And I think we’ll continue to see it around the $75 million to $100 million upto maybe a $150 million in some years. But I don’t think it’s going to be significantly larger than that. Remember, a lot of our growth has come over the last five years and I think we’ve underwritten those opportunities well and they’re not going to be really considered to this type of activity for the most part.

Rich Moore - RBC Capital Markets

Okay, great. Thank you guys.

Operator

Thank you. This concludes the question-and-answer potion of Realty Income's conference call. I will now turn the call over to John Case for closing remarks.

John Case

Thanks Lorenzo and thank you for everyone -- thanks everyone for joining us today. We really appreciate your time. We look forward to seeing the conferences coming often. Have a good evening or afternoon where you are. Take care.

Operator

Ladies and gentlemen, this does conclude Realty Income's first quarter 2014 earnings conference call. We’d like to thank you for your participation. You may now disconnect.

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